C A S E

Peak Garage Door, Inc.

In November 2003, the company planning process for Peak Garage Door, Inc. had justconcluded, and Richard Hawly, Director of Sales and Marketing, was reviewing the cor-porate sales goal for 2004. The plan established a sales goal of $12.5 million for 2004,which represented a 36 percent increase in sales over projected 2003 year-end sales.

During the planning process, a number of fellow executives had voiced concernover whether the distribution approach used by Peak Garage Door was appropriatefor the expanded sales goal. Hawly felt that their concerns had merit and should begiven careful consideration. Though he had considerable latitude in devising the dis-tribution strategy, the final choice would have to be consistent with achieving the2004 sales goal. His approach and action plan had to be prepared in a relatively shorttime to permit implementation in January 2004.

THE COMPANY

Peak Garage Door, Inc. is a privately owned regional manufacturer of residential andcommercial garage doors. Projected year-end company sales were $9-2 million in 2003with a net income of $460,000 (see Exhibit 1). The company manufactures both insu-lated and noninsulated steel residential and commercial garage doors and suppliessprings, cables, rollers, and side roller tracks for its products. Surveys of its dealers indi-cate that the majority of its doors are replacement purchases in the home remodelingsegment of the residential housing market, with the balance of sales going to the newresidential housing market and the commercial replacement garage door market.

The company distributes its garage doors through 300 independent dealers thattypically offer three different garage door manufacturer brands and 50 exclusive dealers

E X H I B I T 1

Peak Garage Door, Inc. Income Statement Projection:For the Period Ending December 31, 2003

Net Sales

Cost of Goods Sold

Gross Profit

Selling, General & Administrative Expenses

Net Profit Before Income Tax

$9,200,000

6,900,000

$2,300,000

1,840,000

$ 460,000

This case was prepared by Professor Roger A. Kerin, of the Edwin L. Cox School of Business. SouthernMethodist University, as a basis for class discussion and is not designed to illustrate effective or ineffectivehandling of an administrative situation. Certain names and data have been disguised. Copyright © 2004 byRoger A. Kerin. No part of this case may be reproduced without written permission of the copyrightholder.

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412 CHAPTER 7 MARKETING CHANNEL STRATEGY AND MANAGEMENT PEAK GARA<

that stock and sell only Peak garage doors. (Exclusive dealers often service competingbrands of garage doors in their market area.) Combined, these 350 dealers service150 markets in 11 western and Rocky Mountain states and parts of north and westTexas.1 The exclusive dealers, however, are the sole Peak Garage Door dealers in 50 mar-kets. According to Hawly, this disparity in distribution policy and market coverageoccurred as a result of the company's early history in gaining distribution. Hawly added,"Peak does not have a policy on exclusive versus nonexclusive dealers. As it so happens,the 50 exclusive dealers have been consistent performers for us. We have chosen not todistribute through other dealers in their markets given the mutually beneficial relation-ship we have enjoyed."

The 350 dealers that sell Peak garage doors engage in garage door sales, installa-tion, and service. Most dealers operate from a single location. All stock and sell garagedoor openers and hardware. The two major garage door opener suppliers are Over-head Door, which also sells the Genie brand, and Chamberlain, which makes openersunder its own label, as well as Craftsman and LiftMaster brands. All 350 Peak GarageDoor dealers are located in markets with populations of approximately 250,000 orless. All 150 markets are roughly equivalent in terms of population and housing unitsaccording to U.S. Census 2000 figures.

Peak Garage Door operates two distribution centers. These distribution centersallow the company to maintain an inventory of garage doors and hardware near dealersfor quick delivery. A distribution facility also operates at the company's manufacturingplant. The company employs 10 technical sales representatives. Eight representativescall on independent (nonexclusive) dealers twice a month on average. Two representa-tives call on the 50 exclusive dealers.

THE RESIDENTIAL GARAGE DOOR INDUSTRY

The residential garage door industry in the United States was expected to post sales of$2 billion at manufacturer's prices in 2003. Steel garage doors account for 90 percentof industry sales. The home remodeling (replacement) market accounted for the bulkof steel garage door sales. Demand for replacement steel garage doors was driven bythe continued aging of the housing stock in the United States and the conversion byhomeowners from wood doors to lighter weight, easier-to-maintain steel doors. Also,product innovation such as insulated steel doors, new springing systems, and residen-tial garage doors with improved safety features have made steel doors popular. Pro-jected 2004 sales of residential garage doors to the home remodeling market were$2.05 billion, representing a 2.4 percent increase.

There are several large national manufacturers and many regional and local manu-facturers in the U.S. residential garage door industry. The largest garage door manufac-turer in the United States is the Clopay Corporation, with annual sales that exceed$400 million. Clopay Corporation markets its garage doors through a network ofsome 2,000 independent dealers and large home center chains, including HomeDepot, Menards, and Lowe's Companies. Other large, well-known garage door manu-facturers are Overhead Door Corporation, Wayne-Dalton Corporation, Amarr GarageDoors, and Roynor Garage Doors. Peak Garage Door, Inc. is considered to be one ofthe smaller regional garage door manufacturers in the industry.

1A "market" is defined by Peak Garage Door as roughly equivalent to a U.S. Census-designated metropolitanstatistical area (MSA). An MSA consists of (1) a city having a population of at least 50,000 or (2) anurbanized area with a population in excess of 50,000, with a total metropolitan population of at least100,000. An MSA may include counties that have close economic and social ties to the central county.Examples of metropolitan statistical areas include the Modesto, California MSA, Pueblo, Colorado MSA, andthe Cheyenne, Wyoming MSA.

THE DIST

AK GARAGE DOOR, INC. 413

E X H I B I T 2

Residential Garage Door Survey Results Summary: 2003

1. Residential garage door name awareness was very low. Just 10 percent of prospectivebuyers could provide a brand name when asked.

2. When asked what criteria they would use in buying a new residential garage door, price,quality, reliability of the installer, and aesthetic appeal of the door were mentioned most fre-quently in that order.

3. Friends, relatives, and neighbors were the principal sources identified when asked wherethey would look for information about residential garage doors. The Yellow Pages and news-paper advertisements were the next most frequently mentioned information sources.A company that may have installed or serviced a garage door opener or repaired an existingdoor also was considered an information source.

4. Thirty percent of prospective buyers expected to get at least two bids on a residentialgarage door installation. Virtually all expected to receive and review product literature,including warranty information, prior to installing a new door.

5. Fifteen percent of prospective buyers said they would install their own residential garagedoor when a replacement was needed.

6. Steel garage doors were preferred to wood garage doors by a nine to one margin.

In early 2003, Richard Hawly commissioned two studies on the residential garagedoor industry in the markets served by Peak Garage Door. One study was a survey of3,000 prospective residential garage door buyers in 25 cities that represented a crosssection of the company's markets. A summary of the survey results is shown inExhibit 2. A second study was commissioned to identify the number of dealers thatinstalled residential and commercial steel garage doors in the 150 markets served byPeak Garage Door and estimate their approximate sales volume. Telephone directo-ries listing independent garage door sellers and installers were the primary datasource for identifying the companies. Using industry data to adjust for sales of garagedoor openers, labor installation charges, garage door and opener maintenance andrepair revenue, and the like, this study identified 3,002 independent garage door deal-ers with estimated 2003 steel garage door sales (at manufacturer prices after adjustingfor markups) of $316.8 million. Replacement parts sold to dealers added another$31.7 million to the estimated garage door sales, bringing the total market size to$348.5 million in 2003. This research also reported that independent garage doordealers did not sell all brands of garage doors carried at an equal rate. As a rule, fordealers that sold three different manufacturer brands, the dominant brand accountedfor 60 percent of their sales, the second brand, 30 percent of sales, and the thirdbrand, 10 percent of sales. Commenting on the research, Hawly said, "These numbersindicate that our market share is 2.6 percent. I know we can do better than that. Infact, the ambitious sales goal of $ 12.5 million in 2004 is achievable given the potentialexisting in our present markets."

THE DISTRIBUTION STRATEGY ISSUE

The company planning process had affirmed the overall direction and performance ofPeak Garage Door's sales and marketing initiatives with good reason. The companyrecorded sales gains in each of the past 10 years that exceeded the industry growthrate and had added 50 dealers in the past decade. The $ 12.5 million sales goal for 2004

CHAPTER 7 MARKETING CHANNEL STRATEGY AND MANAGEMENT

was driven principally by supply considerations. Senior executives were of the firmbelief that the company had to attain a larger critical mass of sales volume to preserveits buying position with suppliers, particularly with respect to raw materials for itsgarage doors, namely, galvanized steel and insulated foam.

During the planning process, company executives agreed that additional invest-ment in advertising and promotion dollars was necessary to achieve the ambitioussales goal. Accordingly, Hawly was able to increase his marketing budget by 20 percentfor 2004. It was decided that this incremental expenditure should be directed at the100 highest-potential markets currently served by Peak Garage Door. These includedthe 50 markets served by exclusive dealers and 50 markets served by independentdealers, which had yet to be finalized. The remaining 50 markets and independent deal-ers would continue to receive the level of advertising and promotion support providedin 2003- This support was typically in the form of cooperative advertising allowancesfor Yellow Pages advertising, with additional incentives for featuring the Peak GarageDoor name, and product literature (see Exhibit 3).

Hawly saw his charge as determining the characteristics, the number, and thelocations of the dealers Peak Garage Door would need to meet its sales goal of $12.5million in 2004. Initially this would involve identifying the types of dealers that wouldwork closely with Peak Garage Door in meeting company objectives.

A number of different viewpoints had been voiced by Hawly's fellow executives.One viewpoint favored increasing the number of dealers in the markets currentlyserved by the company. The reasoning behind this position was that it would be difficult

JIT 3

^operative Advertising Ad Slick

RESIDENTIALCOMMERCIAL

GARAGE DOORSSALES & REPAIRSSPRINGS REPLACEDSECTIONS REPLACEDOPENERS

SECTIONALROLLINGMOTOR OPERATORSALES & REPAIRSINDUSTRIAL OPENERS

DEAL ER IMPRINT

K GARAGE DOOR, INC. 415

for existing dealers to attain the sales goal specified in the corporate plan. Executivesexpressing this view noted that even with a 2.4 percent increase in sales following theindustry trend, it would be necessary to add at least another 100 dealers. They said thesedealers would likely be independent (nonexclusive) dealers located in the 100 marketsnot served by exclusive dealerships. Hawly believed that adding another 100 dealers inits present markets over the next year would not be easy and would require increasingthe sales force that serviced nonexclusive dealers. Executives acknowledged that thisplan had more merit in the long run of, say, three to four years. However, their idea hadmerit as a long-term distribution policy, they thought. The incremental direct cost ofadding a sales representative was $80,000 per year.

A second viewpoint favored the development of a formal exclusive franchise pro-gram, since 27 nonexclusive dealers had posed such a possibility in the last year. Eachof these dealers represented a different market, and each of these markets was consid-ered to have high potential and be a candidate for the new advertising and promotionprogram. These dealers were prepared to sell off competing lines, most of whichwere supplied by regional and local garage door manufacturers. They would sell Peakgarage doors exclusively in their market for a specified franchise fee. In exchange forthe dealer's contractual obligation to stock, install, and service the company's prod-ucts in a specified manner consistent with Peak Garage Door's policies, the companywould drop present dealers in their markets and not add new dealers. Furthermore,these executives noted, the company's current contractual arrangements with itsindependent dealers allowed for cancellation by either party, without cause, with 90days' advance notification. Thus, the program could be implemented during the tradi-tionally slow first quarter of the upcoming year. If adopted, company executivesbelieved the franchise program in these 27 markets could be served by the advertisingand promotion program. The other 50 markets served by exclusive dealers would beunaffected, since the advertising and promotion program was already budgeted forthese dealers. The remaining 73 markets would also be unaffected, except forincreased advertising in 23 high-potential markets.

A third viewpoint called for a general reduction in the number of dealershipswithout granting any formal exclusive franchises. Executives supporting thisapproach cited a number of factors favoring it. First, analysis of dealers' sales indicatedthat 50 of Peak Garage Door's dealers (all exclusive dealers) produced 70 percent ofcompany sales. This success was achieved without a formal franchise program. Sec-ond, these executives believed that committing the company to an exclusive fran-chise program could limit its flexibility in the future. And, third, an improvement insales-force effort and possibly increased sales might result if more time were given tofewer dealers. Although a number had not been set, some consideration had beengiven to the idea of reducing the number of dealers in the 150 markets served by thecompany from 350 to 250. This would mean that the 50 exclusive dealers would beretained and 200 nonexclusive dealers would operate in the remaining 100 markets ofwhich the top 50 would benefit from the additional marketing spending.

A fourth viewpoint voiced by several executives was not to change either the dis-tribution strategy or the dealers. Rather, they believed that the company should do abetter job with the current distribution policy and network.